The US economy added more than half a million new jobs last month, taking unemployment to its lowest for decades despite the Federal Reserve’s efforts to raise rates to fight inflation.
US payrolls increased by 517,000 for January, nearly double December’s total and almost triple the consensus forecast of 185,000. The country’s unemployment rate, at 3.4 per cent, is now the lowest for 53 years.
The figures, which ended a sequence of five months in which job growth declined, led to a bond sell-off as investors reassessed whether the Fed will keep interest rates high for longer to bring inflation down.
“Today’s data point to a labour market that is strengthening, not a labour market that is weakening,” said Eric Winograd, chief US economist at AllianceBernstein.
The Fed has warned investors they are wrong to expect interest rate cuts soon, even as it shifted this week to a 0.25 percentage point rise — lower than 2022’s increases of 0.5 and 0.75 points.
“In order [for the Fed] to cut rates over the summer, as the market is pricing, you not only need to get inflation down but you need to have the labour market cool off as well,” Winograd added.
The central bank still hopes it will be able to bring inflation down to its 2 per cent target without causing a severe disruption to the jobs market in the world’s biggest economy.
But the extent to which January hirings outpaced the forecast led investors to sell the two-year Treasury, which tends to track interest rate expectations. The yield rose 0.21 percentage points to 4.29 per cent — a multi-week high.
The benchmark S&P 500 fell 1 per cent, while the tech-heavy Nasdaq fell 1.6 per cent.
The Bureau of Labor Statistics data also showed average hourly earnings rose at an annual rate of 4.4 per cent per cent.
The BLS said January’s jobs gains were “widespread”, with the leisure and hospitality sector registering the biggest increase, at 128,000 positions, while employment also grew in professional services, healthcare and in government jobs.
“The robust 517,000 gain in non-farm payrolls in January means that, despite most leading indicators of recession flashing red, the economy is clearly not as close to recession as we had suspected,” said Andrew Hunter at Capital Economics.
The BLS also announced upwards revisions to past data. Between March 2021 and March 2022, 568,000 more jobs were created than it had reported. November and December’s figures were also revised higher, by a combined 71,000 positions.
After this week’s Fed meeting, which took the federal funds rate to a range between 4.50 per cent and 4.75 per cent, chair Jay Powell struck an optimistic note about the economic outlook. That ignited speculation the central bank is closer to ending its rate-rising campaign earlier than previously signalled.
But he also cautioned the “disinflationary process” was still in its “early stages” and price pressures remained too intense, especially those linked to the “extremely tight” labour market.
Recent figures showed an increase in job openings for December, bringing the total number of vacancies to 11mn. Unemployment claims also fell last week to their lowest level in nine months.
However, wage growth has ebbed, and companies have begun to cut back on labour costs, by reducing hours and dismissing temporary workers.
In December, the labour force participation rate, which tracks the number of Americans employed or searching for a job, remained below its pre-pandemic level, at 62.4 per cent.
San Francisco Fed president Mary Daly in an interview with Fox Business called the January job growth a “wow number” while also acknowledging that projections in the December survey of Fed officials were still a good signal of where policy is headed.